Robust Industrial Investment Shows No Signs of Slowing

Real estate buyers spent a record-setting amount of cash in the sector in the third quarter and remain bullish on the properties amid healthy absorption and rent growth.

The industrial real estate sector, traditionally known as the land of big, boring boxes, has become the darling of real estate amid the growth of e-commerce. Investors have poured hundreds of billions of dollars into industrial properties over the last five years alone, and not even the prospect of new construction potentially outpacing demand has tempered enthusiasm.

“With online sales continuing to grow at a faster rate than general retail sales, there is no lack of continued tenant demand for industrial warehouses and flex and distribution space,” says Rebecca Wells, CCIM, senior vice president and principal of commercial real estate service provider Lee & Associates in Indianapolis. “We expect investment activity will continue at a red-hot rate through the end of this year and into 2020.”

Industrial sales totaled $40.6 billion in the third quarter this year, the highest dollar volume ever recorded in a single quarter for the property type, according to Real Capital Analytics, a New York-based researcher that tracks commercial property deals of $2.5 million or more. An $18.7 billion transaction in September, in which Singaporean global investment manager GLP sold some 179 million square feet of logistics assets to Blackstone, skewed the numbers. But even excluding that deal, third-quarter industrial investment still topped the average quarterly sales volume of $18 billion from 2014 through 2018, Real Capital notes. Through three quarters of 2019, $77.7 billion of industrial property changed hands, a year-over-year increase of 18 percent.

The Midwest generated a healthy $11.3 billion in dollar volume through three quarters this year, according to Real Capital, an amount that was roughly on par with the same period last year. In Indianapolis alone, some $775 million in industrial facilities have traded in 2019, a year-over-year increase of 7 percent. New distribution centers of more than 1 million square feet developed by merchant builders accounted for many of the trades, illustrating the strong appetite that investors have for the newest, biggest and most modern product in the region, Wells says.

Industrial property cap rates on deals in the Midwest averaged 7.5 percent through the first nine months of 2019, the highest of any region, according to Real Capital. Still, several bulk distribution properties in the Midwest sold at cap rates of 5.5 percent or less, Wells states. Nationally, the average industrial cap rate was 6.3 percent for the year at the end of September, just a tick lower than the prior year.

Widespread Demand

In particular, buyers are scouting for big distribution centers in the Indianapolis, Columbus, Louisville and Cincinnati markets — dubbed the “crossroads of America” by logistics companies — because of the quick and easy access that they provide to a large swath of the U.S., she explains. Investors are also looking for urban infill properties in more densely populated cities like Detroit and Chicago to facilitate last-mile delivery for e-commerce and third-party logistics companies.

Demand is divided among various investor groups, she says. “Institutional investors are big buyers of larger distribution centers and portfolios, while family offices and private buyers have been acquiring one-off properties, which could be flex assets, warehouses or manufacturing space.”

Investors are also hunting for last-mile distribution space in eastern Pennsylvania’s Lehigh Valley and southern New Jersey, says Bob Yoshimura, a newly hired principal of Lee & Associates who is helping to launch the firm’s capital markets platform in the region. In some cases, cap rates for properties in core infill markets have ticked down to around 4.5 percent over the last few quarters.

More recently, that pricing has made some buyers consider alternatives, say Yoshimura and Joe Hill, a senior associate with Lee & Associates, who is on the capital markets team in eastern Pennsylvania.

“A number of investors are taking a hard look at either purchasing existing buildings in the suburbs or developing new facilities that provide accessibility to major highways,” Yoshimura explains. “But generally investors are looking for all types of opportunities throughout the industrial sector.”

Potential Roadblocks

Beyond concerns about the late cycle and an economic slowdown on the horizon, the fact that 2020 is an election year could stymie sales transactions for a quarter or two due to uncertainty over the outcome, Wells says.

New development is another wild card. More than 418 million square feet of industrial space was under construction in the U.S. in the third quarter, up 13 percent from a year earlier, according to Lee & Associates’ Third Quarter Market Report. While the firm expects the nationwide average vacancy rate of 4.8 percent to rise roughly 90 basis points over the next two years, strong absorption and solid rent growth should continue to fuel investment demand, Yoshimura says.

“A consistent stream of tenants across various industries continues to require modern distribution space and accessibility to major regional roadways and population centers,” he declares. “I would characterize the industrial sector as the most sought-after asset class across all commercial property types.”

Positioned for Growth

As Lee & Associates continues their focus on growth, both geographically and in specialty practice groups, the company is making a concerted effort to continue building their investment sales platform nationally. The specialty group is led by a team of senior-level investment sales brokers, including Wells and Yoshimura.

“Our national investment services practice has tremendous momentum, scale and talent.  The foundation for the expansion and success of this group has been the addition of top-level professionals throughout the company,” said Jeff Rinkov, SIOR, CEO of Lee & Associates. “They have done an excellent job of providing advisory and transactional services in the mid-market, which has been very active and productive.”

— By Joe Gose, contributing writer. This article was written in conjunction with Lee & Associates, a content partner of REBusinessOnline.

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